1965-69 if the Navy continues to purchase the three items through the prime aircraft manufacturers. GAO estimate of unnecessary costs: $4.1 million on contracts previously awarded, and an estimated $2.7 million during fiscal years 1965 through 1969. Time period of GAO report: Contracts were awarded during period from October 1954 to June 30, 1964. GAO also projects estimates of unnecessary costs from fiscal year 1965 through fiscal year 1969. DOD comments on GAO findings: The Martin-Baker MK-5 ejection seat design was not stable, and continued procurement through the airframe manufacurer was therefore essential. The design of the horizontal situation indicator was sufficiently stable to have permitted direct procurement from Collins Radio during fiscal year 1963. Due to a serious malfunction, the survival kit did not meet Navy specifications in 1959 to permit either direct or indirect competitive procurement. High potential termination costs and major design changes deferred competitive procurement until fiscal year 1965. DOD comments on costs: No unnecessary costs were incurred. DOD corrective action: The Navy is procuring the horizontal situation indicator and the survival kit directly by competitive negotiation in fiscal year 1965 for both itself and the Air Force. Several alternative courses of action for handling the fiscal year 1965 procurement of Martin-Baker ejection seats are being considered. A special ASPR study is underway to review current procedures and provide more detailed guidance on the matter of Government-furnished equipment. This guidance will include consideration of cost factors and risks resulting from direct procurement by the Government that may offset anticipated savings. GAO Report B-153403, July 21, 1964 97. Title: "Report on Survey of Activities of Selected Defense Contractors Relating to Employee Morale and Recreation" (OSD case No. 2031). GAO finding: GAO found little uniformity in the management and control of morale and recreational expenditures by contractors. In 8 of the 36 contractors' plants surveyed, vending machine income was used to offset the entire cost of employee morale and recreational activities. However, at the other locations contractors provided further financial support for such activities. Most contractors set aside income generated by employee activities, such as vending machine income, and donated the funds to employee organizations to conduct recreational and morale activities. The funds in the custody of these organizations were freely used at the discretion of the organization management, generally without interference of review by the contractor or the Government. Some of these organizations accumulated large amounts of cash and other assets. While employee organizations accumulated surpluses from donations of revenue generated from vending machines, contractors incurred sizable losses in food service operations-an employee activity comparable to vending machine operations-even though funds from vending machine income were more than sufficient to offset the losses in food operations. Expenditures for employee morale and recreational activities charged against Government contracts are subject to selective reviews by Agency auditors and allowability of such charges rests on the judgment of individual contracting officers. Items of cost determined by Agency personnel to be reasonable at one contractor's plant were found by Agency personnel to be unreasonable at another plant. It appears that the interpretation and application of the Armed Services Procurement Regulation by agency personnel have achieved little uniformity as to the nature and extent to which such costs are allowed under Government contracts. GAO estimate of unnecessary costs: Not estimated. Time period of GAO report: Latest 1-year period for which information was available for each of the 36 contractors, usually 1962 or 1963. DOD comments on GAO findings: DASD (A. & A.) reply to GAO dated June 17, 1964, stated it has never been the policy of DOD that certain employee morale and recreation costs are always allowable and certain other costs are always unallowable. Rather, it has been generally the policy that if the contractor has a well-balanced employee morale and recreation program which is equitable to all employees when considered in light of total employee expense under all conditions, the costs incurred are allowable if reasonable in amount. It was also recognized that a need existed for developing additional guidance for evaluating the overall reasonableness of the total employee morale and recreation cost incurred by contractors. DOD comments on costs: Costs not included in finding. DOD corrective action: DOD reviewed the policy set forth in ASPR 15-205.10 (Employee Morale, Health and Welfare Costs and Credits) and 15-205.14 (Food Service and Dormitory Costs and Credits). It was determined that the coverage was not adequate. The following revisions have been approved by the ASPR committee and have been sent to the industry associations for their comments. (a) Losses from the operation of food and dormitory services may be allowed only if the contractor's objective is to operate such services on a breakeven basis. Losses sustained because such services are furnished without charge or at prices or rates which obviously would not be conducive to accomplishment of the above objective are not allowable. (b) Where the contractor has an arrangement authorizing an employee association to provide or operate a service such as vending machines in the contractor's plant, and retain the profits derived therefrom, such profits shall be treated in the same manner as if the contractor were providing the service; i.e., such profits shall be considered as a credit or a reduction of overhead. (c) Contributions by the contractor to an employee organization, including funds set over from vending machine receipts or similar sources, will be allowable only to the extent that the contractor demonstrates that the costs incurred by the employee organization would be allowable if incurred by the contractor directly. APPENDIXES 3A-30-DEPARTMENT OF DEFENSE APPENDIX 3A-POLICY LETTER BY THE SECRETARY OF DEFENSE RE GAO REPORTS There has been an increase in the number of GAO report cases in which DOD comments to the GAO, the BOB, and Congressional Committees are delayed beyond the established 60-day target period (75 days for draft reports involving the military assistance program). Even though the volume of GAO draft and final reports has increased substantially (from 182 during 1961 to 544 during 1964), the requirement for making responsive DOD comments within 60 days has not been changed. In order that responses to GAO may be made within the required period, it is essential that the time schedules established for each case by the Assistant Secretary of Defense (Comptroller), for preparation of proposed comments and for review by appropriate officials, not be exceeded. In the event that it is not possible to make a complete response, a partial or interim reply should be prepared as soon as it becomes evident that the full reply cannot be completed in time, but in no event later than the scheduled time. Please accord adequate staff effort and emphasis to assure that GAO reports are handled on time. /s/ Robert S. McNamara APPENDIX 3B-DOD DIRECTIVE NO. 7650.2, DATED DECEMBER 29, 1961 SUBJECT Department of Defense Action on Audit and Investigation References: (a) BOB Circular No. A-50, "Executive Branch Action on Reports by the GAO on Audits and (b) SecDef multi-DoD addressee memo., "DoD Action Pursuant to the requirements of Bureau of the Budget II. III. IV. SCOPE AND APPLICABILITY This Directive relates to all GAO reports - draft, letter, and final on the work of all organizational elements of the DoD, including the Office of the Secretary of Defense, the Military Departments, and other elements, when copies of such reports are provided by the Comptroller General or subordinate officials of the GAO, or committees of the Congress, or members of Congress, to the Secretary of Defense, to the Secretaries of the Military Departments, or to subordinate officials of the DoD. SYSTEMATIC CONSIDERATION OF GAO REPORTS A. The GAO has the responsibility for making independent audits and B. The Secretary of each Military Department will establish a procedure for the systematic review and consideration of all GAO reports draft, letter, and final - on the work of his department. C. The procedure will be designed to provide for careful, timely consideration of the reports to determine (1) whether the findings are reasonably accurate and complete, (2) whether the conclusions are reasonably valid, and (3) whether the recommendations for improvement are appropriate. INITIATION OF APPROPRIATE MANAGEMENT ACTION FOR CORRECTION OR Constructive management actions will be initiated promptly on GAO recommendations considered appropriate as a result of the aforementioned reviews. Where such action requires clearance by a central agency of the Government, or involves legislation or appropriations, the agency will proceed through the usual channels. V. A-50 STATEMENTS OF COMMENT TO THE BOB AND LETTERS OF COMMENT TO A. Pursuant to BOB Circular No. A-50 (Ref. (a)), the Secretary of Defense, as head of the agency, is required to provide a formal statement of comments to the BOB on each GAO report on the work |